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Liquidity Adjusted VAR


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A trader observes a quote for stock DUY, and the midpoint of its current best bid and best ask prices is CAD 45. DUY has an estimated daily return volatility of 0.38% and average bid-ask spread of CAD 0.14. Using the constant spread approach on a 20,000 share position and assuming the returns of DUY are normally distributed, what is closest to the estimated liquidity-adjusted, 1-day 95% VAR.

a. CAD 1600
b. CAD 5600
c. CAD 6600
d. CAD 7600

This questions from the 2016 FRM part 2 sample question paper.